This invention relates generally to methods and systems for providing an insurance policy with inflation protection. More particularly, the methods and systems of the present invention provide an insurance policy such as for long term care (LTC) with an inflation protection option that allows individuals, e.g., the insured, to purchase additional coverage to offset the effect of inflation on insurance policy limitations.
Insurance policies typically include coverage limitations such as maximum coverage for a given period of time or for a given event. LTC policies, for instance, which insure against the costs associated with care or supervision needed to assist an insured with activities of daily living that may result from long term illnesses or disabilities, normally include maximum coverage limitations such as maximum payable daily benefits and maximum aggregate claims payable for any given time period or event. A problem associated with policies such as LTC policies that include maximum coverage limitations is that maximum coverage limitations are determined or specified at the time the policy is purchased. However, inflation may out-pace the maximum coverage limitations thereby leaving the insured in an increasingly underinsured position over time.
The insurance industry, at least with respect to LTC policies, has adopted two approaches to address the effect of inflation on maximum coverage limitations: a level premium funded percentage increase (“Level Premium”) approach and a guaranteed additional amounts of insurance at attained age rates (“Guaranteed Additional Amounts”) approach.
With respect to the Level Premium approach to inflation, maximum coverage limitations are automatically increased annually at a fixed rate throughout the duration of the policy. The rate at which the maximum coverage limitations are increased is usually specified by the insurer and typically ranges between 1% and 5%, the most common rate of increase being 5%. The rate of increases may be applied as a simple rate increase or as a compounded rate increase. A simple rate increase entails adding to the maximum coverage limitations a percentage of the original maximum coverage, where the percentage corresponds to the specified rate of increase. Compounded rate increases increase the maximum coverage at the specified rate of increase compounded annually. The additional coverage under the Level Premium approach is funded with a fixed additional premium above a premium for a similar policy without inflation protection.
This approach, however, has several shortcomings. In periods of high inflation, for instance, the specified rate of increase may be outpaced by inflation thereby leaving the insured in an underinsured position. In periods of lower inflation, where the rate of inflation is less than the specified rate of increase, the insured will essentially be forced into being overinsured. Additionally, Level Premium policies lock an insured into paying the fixed additional premium for the duration of the policy without the flexibility of being able to opt out from an increase and thereby out from the additional premium for any year. Moreover, the fixed additional premium for the duration of the policy is disproportionately inflated early in the term of the policy as compared to the risk to the insurer in order to compensate for an increasing risk as the insured ages. This is disadvantageous to an insured that, for example, terminates coverage prior to the completion of the term of the policy.
With respect to the Guaranteed Additional Amounts approach to inflation, an insured is granted a right to receive an option to purchase additional coverage that is offered at specific intervals in the duration of the policy. Maximum coverage is typically increased at a rate of increase that is either fixed, e.g., 1%, 2%, etc., or based on the consumer price index (CPI), and the increases may be applied either as simple rate increases or as compounded rate increases. Inflation protection under the Guaranteed Additional Amounts approach, however, normally includes several limitations on the continued right to purchase additional maximum coverage. An insured, for instance, may lose the right to receive the option to purchase increases in the coverage limitations after declining a certain number of offers. The additional coverage under this approach is funded by an additional premium that is computed based on the insured's attained age at the time the offer to purchase additional coverage is made.
The Guaranteed Additional Amounts approach has other shortcomings as well. Since the additional premium is computed based on the insured's attained age and since the risk associated with long term care increases as the insured ages, the additional premium for the additional coverage becomes increasingly more expensive for each successive offer. This drawback is especially unfavorable to an insured that may be on a fixed income or otherwise cannot afford higher premiums beyond a certain monetary limit. Such an insured, therefore, may lose inflation protection altogether because he is not able to pay for additional coverage and may decline a certain number of offers.
A need therefore exists for methods for providing inflation protection for insurance, such as LTC insurance, that is effective, cost sensitive, and otherwise solves the problems associated with the existing methods just described.
This need is also not addressed by existing tools for analyzing and administering LTC policies. For example, U.S. Pat. No. 6,014,632, entitled “Apparatus and Method for Determining Insurance Benefit Amounts Based on Groupings of Long-Term Care Patients with Common Characteristics,” hereby incorporated herein by reference discusses systems for providing LTC insurance coverage with variable maximum benefit limitations that are based on the severity of the health conditions that require long term care. International PCT Application WO 02/15457, entitled “Computer Program and Method for Determining the Economic Impact of Long-Term Care,” hereby incorporated herein by reference, provides for a computer program that assists the user in analyzing the insured and uninsured impact of a hypothetical fact scenario on an individual's personal assets. International PCT Application WO 01/50306, entitled “Decision Support System and Methodology With Multi-Dimensional Analysis,” hereby incorporated herein by reference, provides systems that allow users to determine the actual and expected results for long term care insurance based on data provided to the system. International PCT Application WO 01/69504, entitled “System and Method for Long Term Care Insurance Administration,” hereby incorporated herein by reference, provides a computer based insurance administration system specific to LTC polices for use in processing applications, administering claims, automated billing, etc. The systems and methods discussed in these documents, however, do not address inflation protection and the problems associated therewith.